There is an old wives tale where a high school kid takes an exam with the question “What is Risk?” written at the top. He scribbles the response “This is”, turns in the test, and walks out of the room. No one knows if he gets an A or an F, but the story is a good one.

In the realm of investing, the concept of risk is discussed on a daily basis, as it should be. However, the traditional definition of risk, namely how volatile the market is, is a terrible one at best. “Given all the recent gyrations, stocks are very risky right now” financial pundits declare on a regular basis.

Let’s look at some different – and more relevant, if not valuable – definitions of risk when it comes to investing. Risk comes from not knowing what you are doing. To me, this is the best definition of risk (and not coincidentally, one the great Warren Buffett uses as well): A knife in the hands of a baby poses great risk; the same blade in the palm of a surgeon can save lives.

When it comes to investing, people take risks every day simply by investing in things they do not fully understand. Ask the average investor basic questions about his portfolio including what a given company does, what their revenues are, who their competitors are, what the company’s valuation is and so on, and you will often get a blank stare. Ask them what the current stock price is and you will probably receive a quote that is as fresh as a Krispy Kreme doughnut hot out of the oven.

But knowing a trading price and understanding what you are invested in are two entirely different things, and that is where investors are often taking on unrealized risk.

Risk comes from mismatching time horizons. Competing in a marathon? You better pace yourself so that you can get through all 26 miles. Is your house on fire? Forget the warm up and get your sprint on.

Indeed, different circumstances require unique exertion levels. In the world of finance, time frames (how long the money will be invested) largely dictate how money should be allocated with the least amount of risk. Need the money for a down payment on a house in the next 6 months? Then no matter how strong or weak (let alone volatile) the market is, you should be sitting on cash. To put money in the stock market would be risking capital deprecation when you need to convert investments back to cash so quickly.

Alternatively, if the funds under consideration are for retirement 10 or 20 years out, then cash if the riskiest place to put your hard earned money. How could that be? What is the risk in keeping retirement money in a good old fashioned bank?

The risk you are taking here is that you will not have enough money to support yourself in retirement. Over long periods of time, stocks earn returns well above inflation (i.e. around 9% on average), whereas cash loses money every year after inflation and taxes. Matching your investments with your time horizon is one of the most important ways you can reduce risk.

The fact is: if you are invested in stocks for the long run (5 years or longer) and the market is moving up and down faster than Newt Gingrich’s poll numbers, so what? There is no risk in daily stock gyrations if you do not plan on selling for years to come. Risk comes from not knowing who is managing your money. It is interesting; folks know their attorney, their CPA, their doctor, and the other professionals with whom they entrust their various affairs.

But all too often, they hand their money over to afinancial firm based on some glossy ad or TV commercial with a famous actor as a paid spokesperson. But do they actually know or have they ever even met the person who is making investment decisions on their behalf? Typically not. That person is usually many miles away and layers of an organization removed.

At best, the investor has interacted with some sales person, but could not even name the money manager himself. Do yourself a favor and find a trusted professional who is the decision maker, someone who will sit down with you and discuss your particular goals and objectives and then implement a plan accordingly. You would not be okay never meeting your primary care physician; you should have at least the same standards for your investment professional.

Stock markets can be volatile. It makes for great headline news when the Dow drops 200 points for some big reason or no reason at all. But the truth is… short-term vacillations are just background noise in the long symphony of stock price appreciation, and great fodder for TV finance journalism looking to fill air time and sell ads. Just look at the so-called Flash Crash of 2010 when the market dropped nearly 1000 points in a matter of minutes.

That event made headlines, but for the long term investor it was not even a blip on the radar. Avoid the risks outlined above taken on by many investors and let the day-to-day movements of publicly traded securities keep others up while you get a good night’s sleep.

(The information in this article is strictly for educational and illustrative purposes and is not an attempt to furnish personalized investment advice or services.)